Potter's 5 Forces Modal

Ch2-1

The purpose of Five-Forces Analysis

The five forces are environmental forces that impact on a companys ability to compete in a given market. The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.
Ch2-2

Threat of New Entrants

Economies of Scale

Barriers to Entry

Product Differentiation Capital Requirements

Switching Costs
Access to Distribution Channels Cost Disadvantages Independent of Scale Government Policy

Expected Retaliation
Ch2-3

Bargaining Power of Suppliers

Suppliers are likely to be powerful if:
Suppliers exert power in the industry by: * Threatening to raise prices or to reduce quality

Supplier industry is dominated by a few firms Suppliers products have few substitutes Buyer is not an important customer to supplier Suppliers product is an important input to buyers product

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Suppliers products are differentiated

Suppliers products have high switching costs Supplier poses credible threat of forward integration

Ch2-4

Bargaining Power of Buyers

Buyer groups are likely to be powerful if: Buyers are concentrated or purchases are large relative to sellers sales Purchase accounts for a significant fraction of suppliers sales Products are undifferentiated Buyers face few switching costs Buyers industry earns low profits Buyer presents a credible threat of backward integration Product unimportant to quality

Buyers compete with the supplying industry by:

* Bargaining down prices * Forcing higher quality * Playing firms off of each other

Buyer has full information

Ch2-5

Threat of Substitute Products

Keys to evaluate substitute products: Products with similar function limit the prices firms can charge Products with improving price/performance tradeoffs relative to present industry products Example: Electronic security systems in place of security guards Fax machines in place of overnight mail delivery
Ch2-6

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Rivalry Among Competing Firms in Industry

Bargaining Power of Buyers

Threat of Substitute Products

Ch2-7

Rivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:
Jockeying for strategic position Using price competition

Staging advertising battles Increasing consumer warranties or service Making new product introductions

Occurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse off Advertising battles may increase total industry demand, but may be costly to smaller competitors
Ch2-8

Rivalry Among Existing Competitors

Cutthroat competition is more likely to occur when: Numerous or equally balanced competitors Slow growth industry

High fixed costs High storage costs

Lack of differentiation or switching costs Capacity added in large increments Diverse competitors High strategic stakes

High exit barriers

Ch2-9

McKinsey 7-S framework model

The 7-S framework of McKinsey is a Value Based Management (VBM) model that describes how one can holistically and effectively organize a company. Together these factors determine the way in which a corporation operates.

Ch2-10

The McKinsey Seven-S Model

Strategy

Structure follows strategy Structure

Style

Shared Values

Skills
Systems

Staff

Get the right

Ch2-11

Shared Value
The interconnecting center of McKinsey's model is: Shared Values. What does the organization stands for and what it believes in. Central beliefs and attitudes.

Ch2-12

Strategy
Plans for the allocation of a firms scarce resources, over time, to reach identified goals. Environment, competition, customers.

Ch2-13

Structure
The way the organization's units relate to each other: centralized, functional divisions (top-down); decentralized (the trend in larger organizations); matrix, network, holding, etc.

Ch2-14

System
The procedures, processes and routines that characterize how important work is to be done: financial systems; hiring, promotion and performance appraisal systems; information systems.
Ch2-15

Staff
Numbers and types of personnel within the organization.

Ch2-16

Style
Cultural style of the organization and how key managers behave in achieving the organizations goals. Management Styles.

Ch2-17

Skill
Distinctive capabilities of personnel or of the organization as a whole. Core Competences.

Ch2-18

Blue Ocean Strategy

Creating uncontested market space and make the competition irrelevant

Ch2-19

Two worlds

Red Ocean Compete in crowded markets Blue Ocean Create and capture new market space
Ch2-20

Creating Blue Oceans

Two types of markets:
Red Oceans all industries in existence today (known market space)

Blue Oceans all industries not in existence today (unknown market space)
Ch2-21

New Market Space

There is a fairly good understanding of how to compete in Red Oceans Blue Oceans are known to exist, however, there is little practical guidance on how to create them This book focuses on the analytical frameworks necessary to create Blue Oceans and the managerial strategy needed to sustain them

Ch2-22

New Market Space

In Red Oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known In Blue Oceans, there exists untapped market space, demand creation, and the opportunity for highly profitable growth Most Blue Oceans are created from within red oceans by expanding industry boundaries

Ch2-23

The Continuing Creation of Blue Oceans

How many of todays industries were unknown 100 years ago? Blue Oceans have continuously been created over time The key to strength in the business world is to create new, uncontested market space

Ch2-24

Two worlds
Red Ocean Strategy
Compete in existing market space. Beat the competition. Exploit existing demand.

Blue Ocean Strategy

Create uncontested market space. Make the competition irrelevant. Create and capture new demand.

Make the value-cost trade-off.

Align the whole system of a strategic firm's activities with its choice of differentiation or low cost.

Break the value-cost trade-off.

Align the whole system of a firm's activities in pursuit of differentiation and low cost. VALUE INNOVATION
Ch2-25

The rising Imperative of Creating Blue Oceans

Supply exceeds demand Accelerated commoditization of products and services Increasing price wars Shrinking profit margins Brands are becoming more similar select based on price
Ch2-26

The Rising Imperative of Creating Blue Oceans

Globalism has made many brands become increasingly similar and more of a commodity Technological improvement has caused supply to outweigh demand It is now harder than ever to differentiate among brands
Ch2-27

The Impact of Creating Blue Oceans

In a study of the launches of 108 companies, 86% were line extensions (Red Ocean) However, these only accounted for 62% of total revenues and 39% of total profits The other 14% of launches were aimed at creating blue oceans and accounted for 38% of revenue and 61% of total profit
Ch2-28

The Profit and Growth Consequences of Blue Oceans

Launches With Red Oceans Launches With Blue Oceans Business Launch 86% 14%

revenue impact

62%

38%

Profit Impact

39%

61%

Ch2-29

From Company and Industry to Strategic Move

The company is not the appropriate unit of analysis for exploring blue oceans Blue Oceans focus on the strategic move rather than the company or industry This book focuses on 150 strategic moves made from 1880 to 2000 in various industries Blue Oceans were found to be created by new and old companies, attractive and unattractive industries, and both private and public companies
Ch2-30

Value Innovation: The Cornerstone of Blue Ocean Strategy

Value creation alone improves value but is not sufficient to make you stand out in the marketplace Innovation alone will often create a product that buyers are not willing to pay for Value innovation occurs only when companies align innovation with utility, price, and cost positions

Value innovation:
Make the competition irrelevant Create a leap in value for both buyers and your company Open up new and uncontested market space
Ch2-31

Unlocking non-customer demand

Value Innovation Utility

Create new buyer utilities

Price
Set a price that attracts a mass of buyers

Cost
Set the structure based on a target

Ch2-32